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Accurate pricing of basket options
A pragmatic approach
This article presents some of the key features of Deloitte’s Basket Option Pricer which is designed to price multivariate derivatives in a market-consistent way (i.e. including the smile effect).
The role of the main components of this pricing methodology are explained, in particular, the calibration of the smiles of each stock, the impact of the correlation matrix and of the copula method.
A case study is also presented that illustrates how this methodology reproduces multi-underlying market-traded indices, such as the Dow Jones or the FTSE 100.